A huge stumbling block - Money managment for everybody. Doesn´t matter if it is small or huge account all of us have problem how to manage our money and implement all this stuff to strategy. This article should help you and give you some plot how to do it correctly. Your results could be implemented to your EA or trading style and make it perfect.
Introduction
When we begin to trade most of our time we spend with studing trading methods and reading news. After a while we are starting to think about our money and the main question is always :
" How to set up my positions ? ".
I Think all of us had this problem. For now my question is : "How could
we code an ideal EA when we are not sure about our Money Managment?"
In this article i would like to show you how easy it could be answered and maybe help you to better understand this part of trading.
1. What Money Managment contains ?
One of the most important things is the complexity of our analysis . If you are doing things on 50% you cannot expect any significant profit. Many of traders here will not agree with me but every aspect that is in some way included to the proces of trading is important. Money managment represent such an aspect and is obviously forgotten. The general thinking of a beginner is like : " I do not need it . I will open a trade and wait!"
Most of traders even do not know what a money managment contains. The main parts are?
- daily plan ( or weekly , monthly etc.)
- risk managment
- profit protection
Maybe in other literatures you will find some more parts of it but lets
say that now we are talking only about the basic Money Managment.
1.1. Daily plan
Many of you will find this as not important but i will do only what
everybody is doing and nobody is talking about it - counting money. Yes
you are reading it very well. The answer for your question why is very
simple. From psychological point of view all of us need some target ,
objective or all of us have a dream. From practical point of view we
need statistic how often we are trading and if we are succesfull. This
daily plan must be set according to your trading style - scalper ,
daytrader or long term trader. In some way there could be set some
general trading plan on diferent "time frames" . For example you can say
: " My plan is to :"
- Daily plan - daily to earn 10 dollars
- Weekly plan - weekly earn 60 dollars
- Monthly plan - monthly earn 180 dollars
You can set your target on each time frame separately. Of course the plan should be build according to your size and leverage of your account. The next step is to visualize the whole proces of earning money with starting capital 100 dollars. The setting of daily target is very easy and if you will print it you see for each day what should you earn and next to each column write if you were sucessful or not. If you are than your trading system is good. If you are not you are doing something wrong. Another situation is that you are taking profit but not according to plan. My answer is that it really does not matter. In the table we have got the total earning of 175 dollars. Do you want 175 ? I want . Lets say you will earn half of it. Do you want 87 dollars ? I want... etc etc. The main point is that you are forming a profit and you can see how you progres in your plan. What is more important the plan can be formulated also with pips. To summarize it we should ask :
- how much money do i want to earn each day
- how many trades or pips i want to make each day
| Day | Target | Result |
|---|---|---|
| 1 | 5 | 105 |
| 2 | 5 | 110 |
| 3 | 5 | 115 |
| 4 | 5 | 120 |
| 5 | 5 | 125 |
| 6 | 8 | 133 |
| 7 | 8 | 141 |
| 8 | 8 | 149 |
| 9 | 8 | 157 |
| 10 | 8 | 165 |
| 11 | 10 | 175 |
| 12 | 10 | 185 |
| 13 | 10 | 195 |
| 14 | 10 | 205 |
| 15 | 10 | 215 |
| 16 | 12 | 227 |
| 17 | 12 | 239 |
| 18 | 12 | 251 |
| 19 | 12 | 263 |
| 20 | 12 | 275 |
Table number 1: Example of a daily plan (source : own source)
1.2 Risk managment
So after we have set our daily targets there is the second level of money managment and maybe more interesting for you. Risk managment and how to set your lot size , how much you can risk from your account. Nowadays it is very hard to say how much should we risk . The universal answer from each trader is : " According to your size and leverage of your account!" And yes that is true but nobody will tell you the percentage or whatever. First of all we must know the size of our leverage and need to know how much money will secure your margine at the size 0,01 till 1 lot. According to this you will be able to use formula or the 2% per trade risk rule. Keep in mind that we are talking about symple trading system. In more complicated portfolios the whole system is more difficult. After this we will get :
Account size x 2% = risk amount
In our case with 100 dollar account the formula will be :
100 X 0,02 = 2 - amount i can risk.
Many profesional traders say that this rule do not need to be such
cruel and the range could be from 2 - 10% and i think that it is enough
for each trader. Generaly the risk managment will in some way show
according to the amount i can risk if our daily target is realistic or
if im just a dreamer. With this fact you can reorganize it and set it on
more realistic level from 5 dollars to 2,5 dollars per day and later
when you will have more money on the account you can again rise your
daily target.
In the case that you have set your daily target with pips you need to think about " time aspect". If we have a daily target of 50 pips than you should trade :
| Number of trades | Profit in pips |
|---|---|
| 1 | 50 pips |
| 2 | 25 pips in 2 trades |
| 3 | 20 pips in 2 trades and 10pips in 1 trade |
| 4 | 20 pips in 1 trade and 10 pips in 3 trades |
| 5 | 10 pips in 5 trades |
| 6 | 10 pips in 4 trades and 5 pips in 2 trades |
| 7 | 10 pips in 3 trades and 5 pips in 4 trades |
| 8 | 5 pips in 7 trades and 15 pips in 1 trade |
| 9 | 5 pips in 8 trades and 10 pips in 1 trade |
| 10 | 5 pips in 10 trades |
Table number 2 : Number of trades with the combination of pip targets ( source: own source)
The result of this table is very simple and will probably also form your trading style if you will be a scalper or another sort of trader. But the main point could be summarized into these postulates:
- the lower number of trades will lead to higher target point and time spend in one trade ( if you prefer this one you will more conservative trader from the aspect of time)
- the higher number of trades will lead to lower target point and time spend in one trade ( you are more progresive trader and you like to risk)
The risk in the case of higher number of trades could be lowered by your own trading system ( that means how reliable is it) and by another part of money managment profit protection.
1.3 Profit protection
Maybe i will repeat again but in the case of money managment we should
set a realistic plan and profit and please we should realize that 10
hours of trading per day at the front of computer is not an ideal plan
for us. You will not earn more money ... believe me. Remenber that the
way of " successful trader " is very loooong. If we want to be a
successful we need to use some instruments like trailing stop, stop loss
and target point. Always remenber : " I MUST PROTECT MY PROFIT !
- By setting a small TP - the general rule is based according to your daily target and number of trades but remenber that by setting of TP you can easily leave your computer and take a coffe.
- By setting of stop loss - we can use the 2% risk per trade rule so that means that SL should be counted to he equasion. Generaly the stop loss could be set in many different ways according to instrument you are trading with. By setting of SL you will not blow your account.In the case of currencies the size of SL should be set according to reward - ratio. That mean if your SL is 25 pips than your TP should be also 25 to have r:r = 1:1 . The question if it si good or bad i would say something in the middle. Many daytraders or long term traders are setting the SL on the level of 25 pips. If you will use this rule and your trades will be negative please stop trading and backtest the whole trade again and find the mistake. After a few minutes your trade could be in positive numbers. At this moment you can set your stop loss on the open prize + profit that cover the commision and swap .
- By setting a trailing stop - very simple instrument that help us to lock our profit after a number of pips that could be set.
2. Conclusion
As you can see this article is not based on coding but on useful facts that can help you to make your EA, script or whatever more perfect. If we should summarize this whole article than we could say that the question of Money managment is very difficult but it would be perfect to have all these aspects in our EAs etc. For each plan have a scenario, for each target have a scenario , for each leverage have a scenario with the automatic usage of eg. 2% risk per trade rule, trailing stop or TP. There is a huge possiblity to realize yourself with this article and use it for your purpose ... and maybe you have learned something new.
Good luck and many many green pips !
